SAMSARA INC IOT S
December 07, 2023 - 9:18am EST by
heffer504
2023 2024
Price: 34.62 EPS NM NM
Shares Out. (in M): 621 P/E NM NM
Market Cap (in $M): 21,800 P/FCF NM NM
Net Debt (in $M): 725 EBIT 0 0
TEV (in $M): 21,000 TEV/EBIT NM NM
Borrow Cost: General Collateral

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Description

Samsara (IOT) is a company that provides hardware and software for asset tracking and management.  The vast majority of their market is new-generation telematics devices for fleets, largely heavy-duty trucks, which track the positions, fuel usage, and speed of the vehicles.  This is both to allow for more effective utilization of the assets, but also to comply with DOT laws around hours of service for drivers.

 

The company’s “blue sky” dream is to attach a tracking device to each piece of hardware in the world, but the reality is that the vast majority of the economic use cases are for fleets of vehicles—mostly large trucks, but also mining and construction equipment.  The problem for IOT is that every heavy-duty truck already has a telematics/ELD device, so that they need to replace an existing system.  While IOT’s system is very good, competitors have also improved.  Most importantly, Verizon (the largest competitor) did not have an integrated AI-enabled dash camera system until 2022.  Here are some ratings of competitors—you can see that IOT is well-rated, but so are many others:

 

Notably, Motive and Omnitracs have stepped up their capabilities as of late:

 

The fact that they lost a massive USPS contract to Geotab recently also reinforces this notion.  Their growth might hit a wall before long, as (per the BLS), there are only 4M trucks in fleets of 15 or more in the US.  At $350/year of revenue, this is less than 2x where they are today.  Of course they will have some business in other areas, but the point is that this market will be saturated much sooner than is realized given its size.

 

In order to grow, IOT has been giving away/bundling the hardware into a software subscription.  It is unclear whether they are accounting for this correctly (Spruce Point, for example, discussed this, among other issues: https://www.sprucepointcap.com/research/samsara ).  There are some transcripts in Tegus about aggressive accounting around the hardware component, also.  As a result, the company is not profitable despite having significant scale, and instead it emphasizes that it is free cash flow positive, barely. 

 

Part of the reason that it is FCF positive is that its SBC is beyond crazy.  It is likely that they will issue >40M RSUs this year, which is $1.4B of equity value for a $35 stock.  Revenues are only $900M!!!  I would further note that they changed their accounting for RSUs before the IPO so that the current SBC expense is understated and will be for another few years.  They claim to target 2-3% dilution over the long term, but when your stock trades at 20x sales, 2.5% dilution is equivalent to 50% of sales.  Since their stated goal is to achieve a 20% adjusted OM, this likely implies zero GAAP earnings, forever.  So, this company exists solely to enrich insiders, as far as I can tell.  It should come as no surprise that insider selling is rampant.

 

Valuation is insane.  Given the small TAM and the low/negative margins, it isn’t really worth getting into.  Suffice it to say that this is a $22B company that raised money at $1.4B in 2018 and has incinerated value since then.

 

Why now?  Well, despite the stock’s reaction, last quarter had major issues.  Specifically:

 

After steadily climbing ~$2M every quarter, cash R&D suddenly dropped $2M sequentially.  This was ascribed to "improved operating leverage" which, of course, is nonsensical.  

 

Additionally, while they trumpeted their 40% revenue growth, net new ARR growth slowed sequentially to 20%, and was only $73M vs. $74M in Q2.  They conveniently removed the "net new ARR" slide from their deck.

 

Finally, "connected device costs" declined.  As these are the pieces of equipment that are installed in customers' trucks (and then paid for over time through the subscription price), one would expect them to be increasing linearly with new customer additions (the cash flow statement shows investment of new devices, net of amortization of existing devices). The $32M of hardware added is down sequentially and is among the lowest in the last 2 years.  I think this reinforces the idea that growth may be elusive for them since most fleets have telematics installed already.  Ironically, if they had added more new hardware, and/or cash R&D spend had increased, then they would have been FCF negative for the quarter, killing their whole narrative.

 

 

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

growth disappoints

insider selling

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